Copper

As AAPL surges over 3% on the second lowest volume in 3 weeks, the start of Q2 was exuberance-exemplified as stocks, commodities, and Treasuries all enjoyed a bid - though most of the excitement was from the US open to the European close only. A weak start as European credit and equity markets leaked lower (as did ES - S&P 500 e-mini futures) was extinguished as the US day session opened and while construction spending was a bust, ISM managed a small beat. This didn't seem like the catalyst really but we were off to the races as everything rapidly levitated into the European close - except US credit markets which were far less sanguine once again. Stocks stalled at that point and limped on to test last Tuesday's overnight highs before sliding back 6pts or so into the close. Typical high-beta QE-driven sectors outperformed with Energy and Materials heavily bid but even they gave back some advantage into the close as did Tech and Financials. Oil staged a magnificent recovery (best performance from low to high today) topping out over $105 but just outperformed (from Friday's close) by Copper and Silver which ended up around 2.4%. Treasuries rallied 8bps from overnight weakness to their best of the day but son after the macro data, TSYs sold off with the long-end underperforming - though the entire complex ended lower in yield on the day. AUD and JPY strength matched on another providing little support from carry FX as the USD limped weaker - though Gold tripled the USD's performance managing +0.47% and a close above $1675 once again. VIX gapped notably higher at the open but rapidly compressed but from the close of the European session it pushed considerably higher to end the day fractionally higher (oddly on a decently higher equity market performance).

The ISM Manufacturing Index, which in the aftermath of last week's weak Chicago PMI was whispered to be a miss, came at 53.4, on expectations of 53.0, up from 52.4 in February, once again continuing the narrative of a Schrodinger economic reality. While Production and Employment both rose, New Order declined from 54.9 to 54.5; What is truly suspect is that Prices dropped also from 61.5 to 61.0, putting the validity of this report in question especially following the explosion in the Chicago PMI prices paid. Perhaps HSBC was responsible for that particular report too? In other news, Construction Spending plunged from an unrevised -0.1% (revised to -0.8%) to -1.1% on expectations of a rise to 0.6%, the lowest print since July 2011. All in all, a release pair as expected, affording Bernanke the ability to be easy if need be, although giving stocks enough pump to offset weakness from Europe and Japan, telegraphing that the drop in the market does not need to begin just yet for New QE deliberations.

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Iran's oil exports have dropped in March as buyers prepare for sanctions, and shipments are likely to shrink further if Obama determines by Friday that markets can adjust to less Iranian oil and tightens sanctions even further. Sanctions could eventually leave half of Iran's oil output cut off from international markets, according to analysts and officials. Iran is also being excluded from global commerce and the global economy by being locked out of the international payment system – SWIFT. SWIFT, the Brussels based clearing house, announced last week it will cut services to Iranian banks on foot of European sanctions, in order to comply with the EU Council. The service denial includes Iran’s central bank, which processes Iran’s oil revenues. Some 30 Iranian banks will be blocked from doing international business. History suggests that the trade, economic and currency war with Iran may soon degenerate into an actual war. Increasingly, the regime in Iran has little to lose in engaging in a more aggressive foreign policy – including attempting to close the strategically important Straits of Hormuz.

For every semi-positive data point the bulls have emphasized since the market rally began, there's a counter-point that makes us question what all the fuss is about. The bulls will cite expanding US GDP in late 2011, while the bears can cite US food stamp participation reaching an all-time record of 46,514,238 in December 2011, up 227,922 participantsfrom the month before, and up 6% year-over-year. The bulls can praise February's 15.7% year-over-year increase in US auto sales, while the bears can cite Europe's 9.7% year-over-year decrease in auto sales, led by a 20.2% slump in France. The bulls can exclaim somewhat firmer housing starts in February (as if the US needs more new houses), while the bears can cite the unexpected 100bp drop in the March consumer confidence index five consecutive months of manufacturing contraction in China, and more recently, a 0.9% drop in US February existing home sales. Give us a half-baked bullish indicator and we can provide at least two bearish indicators of equal or greater significance. It has become fairly evident over the past several months that most new jobs created in the US tend to be low-paying, while the jobs lost are generally higher-paying. This seems to be confirmed by the monthly US Treasury Tax Receipts, which are lower so far this year despite the seeming improvement in unemployment. Take February 2012, for example, where the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011. BLS had unemployment running at 9% in February 2011, versus 8.3% in February 2012. Barring some major tax break we've missed, the only way these numbers balance out is if the new jobs created produce less income to tax, because they're lower paying, OR, if the unemployment numbers are wrong. The bulls won't dwell on these details, but they cannot be ignored.

Dumbfounded. That’s the only way to describe the reaction that future historians will have when they look back and study the utter perversion that is our global financial system. We live in a time when a tiny handful of people have their fingers on a button that can conjure trillions of dollars, euro, yen, and renminbi out of thin air. In the United States, it comes down to one man. Just one. With a single decision, he controls the lever that dominates the entire economy. When you control the money, you control everything– financial markets, consumer prices, risk perceptions, investment habits, savings rates, hiring decisions, pay raises, sovereign debt, housing starts, etc.  One man.

Gold managed a 1.8% surge today (back above $1690 and its 200- and 100-DMAs and its largest jump in 2 months) from Friday's close thanks to the combination of the ECB on Friday and Merkel and Bernanke today assuring the world that anything more than a 2% dip in stocks will not be tolerated. While Silver outperformed Gold from Friday's close, based on its 2-3x beta of the last year this was a notable 'underperformance' as Gold outpaced everything (beta adjusted). Perhaps importantly, the S&P 500 when priced in gold met and rejected resistance at a key level today - even with its nominal 30pt rally off of Friday's S&P lows. Volumes were abysmal with stocks well below YTD average and the S&P futures 20% below average and among the lowest few days' volumes of the year. Credit markets did not participate as exuberantly (though HY outperformed IG as you would expect) but the day seemed split into 4 segments: pre-Bernanke (quiet/sideways), Bernanke to US Open (rampfest, Gold outperforms, TSY rally), US Open to EU Close (TSY selloff notably, equities sideways, Gold rips), and then from EU Close to US Close (Equity/Gold/TSY rally as USD leaked lower). In FX, JPY was relatively stable at its lows after Bernanke's speech as the rest of the majors strengthened versus the USD (as EUR broke above 1.3350 once again). Oil managed a small rally on the day but underperformed the USD's 0.5% weakness from Friday as Treasuries were very flip-floppy today - ending the day with a small twist around 7Y (30Y +3bps). VIX made new lows and closed there as the term structure flattened further to its flattest in almost 4 months (with the largest six-day flatttening in 8 months).

• BOJ Crosses Rubicon With Desperate Monetary Policy, Hirano Says (Bloomberg)
• Europe’s bailout bazooka is proving to be a toy gun (FT)
• Monti Signals Spanish Euro Risk as EU to Bolster Firewall (FT)
• Merkel set to allow firewall to rise (FT)
• Banks set to cut $1tn from balance sheets (FT)
• Supreme Court weighs historic healthcare law (Reuters)
• Spain PM denied symbolic austerity boost in local vote (Reuters)
• Anti-war movement stirs in Israel (FT)
• Obama to Ask China to Toughen Korea Line (WSJ)
• Pimco’s Gross Says Fed May ‘Hint’ at QE3 at April Meeting (Bloomberg)

In an interview with Louis James, the inimitable Doug Casey throws cold water on those celebrating the economic recovery. "Get out your mower; it's time to cut down some green shoots again, and debunk a bit of the so-called recovery."

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The global economy remains on shaky ground.  China’s manufacturing activity contracted for its 5th straight month, the US recovery is still very early to call, and the euro zone debt crisis may not be finished. Eurozone PMI data is due later today which will show how the economy is doing after Greece averted default earlier this month. Thomson Reuters GFMS have said that gold at $2,000/oz is possible - possibly in late 2012 or early 2013. Thomson Reuters GFMS Global Head of metals analytics, Philip Klapwijk, featured on Insider this morning and advised investors to "buy this gold dip”.  Gold should be bought on this correction especially if we go lower still as we may need a shake-out of "less-committed investors." Klapwijk suggested that a brief dip below $1,600 is on the cards but the global macro environment still favours investment, notably zero-to-negative real interest rates and he would not rule out further easing by either the ECB or the Fed before year end.

Futures continue exhibiting a very surprising and ever brighter shade of ungreen as the morning session progresses, starting with the 5th consecutive contractionary Chinese PMI data, going through disappointing European Manufacturing and Services PMIs which came below expectations (47.7 vs Est. 49.5 for Mfg; 48.7 vs Est. 49.2 for Services), with an emphasis on French and German PMIs, both of which were bad (German Mfg PMI 48.1, Est 51, prior 50.2; Services PMI 51.8, Est. 53.1, Prior 52.8), and concluding with UK sales which printed at -0.8% on expectations of -0.5%. And just like that Europe is "unfixed", prompting economists such as IHS' Howard Archer to speculate that following "worrying and disappointing" Euro PMI data, the ECB may cut rates to 0.75%, as Europe is finding it hard to return to growth after the Q4 contraction. And with that the beneficial impact of the €1 trillion LTROs is now gone, as Spain spread over Bunds has just risen to the widest in over 5 weeks, and the beneficial market inflection point passes - prepare for LTRO 3 demands any minute now.

Turning on the screens this morning to red pixels was an odd feeling for anyone who has traded stocks this year and while the low was put in soon after the US open the slow and steady weak volume limp higher in equities (led by financials and too-hot-to-handle Apple) got ES (the e-mini S&P futures contract) back up to close at 1400 on the nose (-4pts on the day). Investment grade credit was generally an outperformer relative to stocks today (though AAA corporates were net sold perhaps on rotation back into Treasuries) though the roll in credit derivative markets hinders comparisons a little, however, high yield credit dwindled a little (on light flows) into the close. Commodities were the hardest hit of the day - dramatically underperforming the implied weakness of a modestly stronger USD. Silver, which recovered well off its lows of the day, was equal worst performer with Copper as China's slowdown story dominated. Interestingly Oil also fell as increased supply news hit pushing WTI under $106. Gold outperformed (though was lower on the day) and stands down only 0.6% on the week now (less than half the losses of the other metals/oil). Treasuries (as we already noted) broke their record losing streak with a modest 1-2bps compression in yields close to close (after being closed for the Japan session last night). A relatively large jump up in EURUSD near the US day session open was the biggest news in FX markets but that leaked away all day as the USD limped high off that low (helped by AUD and JPY weakness). VIX managed to rise once again.

"Whocouldanode?" that Apple would do something like pay a de minimus dividend and begin a modest buyback program? Indeed, initial reactions for the stock seemed to be 'sell the news' but of course, it wouldn't be a day ending in 'y' if Apple didn't close green and sure enough, with seconds to spare, Apple managed to close over $600 for the first time. BofA, not so much. After pinging $10 (a healthy double of recent lows), chatter of a secondary began the process of 'normalizing' its recent behavior (the stock is still up 17% post JPM-divi/Stress test news, a whopping 10% better than any of its peers in that 4 day period). The leak in financials dragged on the S&P which limped back lower to close almost perfectly at its VWAP as NYSE trading volumes (after almost record-breaking high levels on Friday OPEX hedge removal day) dropped back to near their lows . Credit outperformed equities today but its a very 'technical' day for credit in general with the CDS/index rolls tomorrow (meaning the major credit indices will move to new maturities and new components) though HYG staggered notably early in the day. USD and Treasury weakness were the headlines of the day (aside from AAPL of course - which apparently has a great new screen) which of course helped commodities rally with high-beta Silver the best on the day +1.2% from Friday and WTI breaking $108 as Gold limped higher (tortoise-like) over $1660 at the end. VIX rose once again and the term structure flattened a little but once again post-OPEX and futures roll, there are some more difficult apples-to-camels comparisons there. Finally we note average trade size in ES today was its largest since 7/1/11.

Between our overnight discussion of the size of the Fed's QE and Goldman's call for QE as soon as April, risk assets all synced and surged today as the USD gave back most of the week's gains. The S&P 500 managed to close above 1400 for the first time since June of 2008 on decent volume - even as AAPL closed down 0.7% (and -2.5% from the $600 threshold it peered over) as financials once again took the lead. BofA is now up 13.6% from pre-JPM-dividend news (more than double its peers) while GS and C languish up only around 2% from that point. High-yield credit markets were nothing like as QE-ebulient as stocks today as investment grade outperformed (more up-in-quality rotation) and the last 45mins actually saw active selling in HY and HYG while IG and the S&P leaked higher. Treasuries steepened very modestly with the long-end maybe 1bp higher in yield close-to-close but the 7-8bps compression off overnight high yields is noteworthy and brought the broad risk asset complex back in CONTEXT with stocks (after yesterday's dislocation). The USD lost around 0.4% from late last night on the day (though still stronger on the week) as EUR and JPY tracked it broadly but higher yield AUD outperformed handsomely (more QE-funding currency needed). Commodities bounced nicely with Copper the day's winner followed closely by Gold and Silver (up around 0.9%) and Oil practically unchanged after dipping over 1% on the SPR chatter and recovering on the denial. VIX ended the day (spiking) higher and the term structure very slightly flatter. After spiking Friday and Tuesday (as we broke the uptrendline) average trade size has drifted notably lower and was its lowest in over a week today suggesting less institutional buying here.